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Company Shares Flashcards

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1
Q

What is the ‘nominal value’ of a share?

A

the value of the share at the point it was originally issued (also called fixed par value or face value)

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2
Q

What is a ‘share premium’?

A

any value above the nominal value. The share will be considered to be ‘issued at premium’.

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3
Q

How is the share premium calculated?

A

The premium is calculated by finding the difference between the share issue price and the par value of shares offered for sale

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4
Q

What is share capital?

A

Share capital is the money provided by SHs in return for shares

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5
Q

What is the purpose of the doctrine of share capital?

A

to protect creditors as SHs have LL

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5
Q

What is the doctrine of share capital?

A

A rule that a company cannot return capital to its SHs unless one of the statutory exceptions applies, i.e.:
o A company buys back its own shares (following statutory procedure)
o A company buys back its shared under a court order to buy out an unfairly prejudiced minority SH
o In winding up once creditors have been paid

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6
Q

What will the articles of association set out in relation to shares?

A

The AA will set out the exact rights for SHs attached to each type/class of share

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7
Q

What are the main types of share?

A

o Ordinary shares
o Preference shares

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8
Q

What rights are usually attached to ordinary shares?

A

o Each share has an equal entitlement to dividends that are declared
o Each share has a voting right

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9
Q

How are preference shares different to ordinary shares?

A

PS carry rights that take preference over OS

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9
Q

How can ordinary shares be divided? Why is this done?

A

There can be different classes of ordinary shares and each class can have different rights, i.e. Ordinary A Shares and Ordinary B Shares

Classes of shares are commonly used enable a different amount of dividends for each class of share

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10
Q

What rights are usually attached to preference shares? What does this mean in effect?

A

Usually, PS carry a right to receive a fixed dividend and have no/limited voting rights

Therefore, if the company has made a profit, the PS holder has a right to receive dividends before OS holders. The dividend they receive will be a fixed sum that reflects a % of their capital contribution

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11
Q

What is the most attractive type of share to an investor and why?

A

Preference shares to investors who simply want money and don’t want to be involved in the decisions of the company

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11
Q

How is the dividend payable on preference shares often expressed? Give an example.

A

The dividend payable on preference shares is often expressed as a % of the nominal value of the preference shares. This is fixed unless the AAs state otherwise.

i.e. ‘5% preference shares’ then the SH will receive a fixed dividend of 5p for each £1 preference share they own.

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12
Q

What is the effect of a dividend payable on a preference share being a fixed %? Give an example.

A

if the company does well, they will still only receive a fixed sum

o Mr Smith invests £100,000
o In return, Mr Smith receives 5% preference shares
o If the company makes profit, Mr Smith will receive 5% of their initial investment by way of dividend i.e. £5,000.
o Other SHs will only receive a dividend if there are any profits remaining

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13
Q

What is the presumption if the preference share carries a right to a fixed dividend? What does this mean?

A

There is a presumption that the dividend is cumulative (unless otherwise stated in the AA).

This means that if the PS holder is not paid in one financial year, the dividends owed must be paid in subsequent years before OS holders are paid.

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14
Q

What is a non-cumulative preference share?

A

The PS holder is only entitled to profits from each year i.e. if the company does not make a profit that year, then the PS holder will lose the right to those profits. They will not carry over into the next year.

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15
Q

What is a participating preference share?

A

This is when the PS holder has a right to a fixed dividend and a right to further profits made by the company

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16
Q

When is the allotment of shares process used?

A

This is when a company will create new shares and receive consideration for them. This is a way to raise funds for the company.

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16
Q

How do participating preference shares work?

A

 Participating PS holders receive their fixed dividend
 The AAs set out a specific amount of dividends the OS holders receive per share
 Once the OS holders have received the prescribed amount, the participating PS holders then receive a further % of the profits

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17
Q

When allotting shares, when does a special resolution need to be passed? Why?

A

If the company is issuing a new type of shares i.e. they already had ordinary and they now want to issue preference for the first time.

This is because the articles would need to be amended to include the new type of SHs’ rights

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18
Q

What is the effect on existing shareholders when shares are allotted?

A

the % of shares held by existing SHs decreases.

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19
Q

What are the three key questions when dealing with allotment?

A

o Are there any constitutional restrictions on allotment?
o Do the directors have authority to allot shares?
o Are there any pre-emption rights?

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19
Q

re: allotment of shares

what is the position on constitutional rights in relation to companies incorporated after 1 October 2009?

A

o Check the company’s articles for a limit on the number of shares
o If they have the MAs, there will be no limit on the number of shares
o If there is a limit, the articles need to be changed by SR

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19
Q

re: allotment of shares

what is the position on constitutional rights in relation to companies incorporated before 1 October 2009?

A

o Check whether they have updated their articles since 2009
o If not, then there will be an authorised share capital (ASC) clause.
o The SHs will need to pass an OR to remove the ASC.

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20
Q

re: allotment of shares

What is important to always check?

A

A company’s AAs, as this may change the default position

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21
Q

re: allotment of shares

Which directors can allot shares without shareholder approval? What power is this under?

A

This is automatic power under s550 for directors of LTDs incorporated after CA 2006 and with one class of share (and are issuing more of the same kind)

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22
Q

re: allotment of shares

Which directors cannot allot shares without shareholder approval?

A

o Ds of LTDs incorporated before CA 2006
o Ds of LTDs with one class of share but authority under s550 has been disallowed under the articles
o Ds of LTDs with more than one type of share
o Ds of PLCs

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23
Q

re: allotment of shares

Where directors require shareholder approval, how can this be authorised by shareholders and under what provision?

A

s551 provides that authorisation can either be from:
o The company’s articles; or
o By OR of the SHs

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24
Q

re: allotment of shares

what can the shareholders authorise under s551?

A

The authorisation may be in relation to a specific allotment or a general authority to allot.

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25
Q

re: allotment of shares

what must the s551 authorisation state?

A

The maximum amount of shares that may be allotted; and

The date on which the authority will expire which is not more than 5 years from either:
 The date of the company’s authorisation; or
 The date of the resolution

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26
Q

re: allotment of shares

Can s551 authorisation be renewed?

A

Yes, for a period up to 5 years.

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27
Q

re: allotment of shares

Can s551 authorisation be revoked?

A

Yes, at any time by OR.

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28
Q

re: allotment of shares

What is meant by pre-emption rights?

A

Under s561, existing ordinary SHs must first be offered the number of shares that will enable them to preserve their % shareholding before the shares are offered to other buyers

NB: this applies to ordinary shareholders only.

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29
Q

re: allotment of shares

What is an equity security?

A

re pre-emption rights, the legislation refers to the shares as ‘equity securities’ but in reality these are just ordinary shares

30
Q

re: allotment of shares

what must the pre-emption offer state? What conditions are attached to this?

A

The period for acceptance. This cannot be less than 14 days and the offer cannot be revoked within the period for acceptance .

31
Q

re: allotment of shares

When does the s561 pre-emption right apply?

A

The pre-emption right applies to all allotments of ordinary share, unless:
o All of the SHs have agreed to waive their pre-emption rights in relation to the proposed transaction;
o They have been excluded or amended in the company’s articles
o They have been disapplied by SR (+s571 procedure if applicable); or
o One of the exceptions applies, i.e. existing ordinary SHs do not have any pre-emption rights where:
 The allotment is of bonus shares
 The consideration is non-cash (i.e. property)
 The shares are allotted under an employment share scheme

32
Q

re: allotment of shares

Can directors disapply pre-emption rights?

A

Yes, but this will depend on whether they have the authority to allot under s550 or s551

33
Q

re: allotment of shares

What is the effect if pre-emption rights are disapplied? Why would a company do this?

A

Ds can offer shares to sellers without needing to offer them to existing SHs.

This might be desirable if they want to sell to a specific person.

34
Q

re: allotment of shares

How can directors with authority to allot under s550 disapply pre-emption rights?

A

if they have power under:
1. the AAs; or
2. special resolution

35
Q

re: allotment of shares

How can directors with authority to allot under s551 disapply pre-emption rights?

A

This will depend on whether they were given authority to allot generally, or for a specific amount:

General - can disapply pre-emption rights using powers under the articles or by SR (s570)

Specific - by special resolution

36
Q

re: allotment of shares

Where a special resolution is needed to disapply the pre-emption rights, what are the requirements?

A
  1. The SR must be recommended by the BOD
  2. The BOD must make a written statement that includes:
    * Reasons for the recommendation
    * The amount the purchaser will pay
    * The BOD’s justification for this amount 3. It is an office to knowingly or recklessly include false information in the statement
  3. The statement must be circulated with either the notice of GM or with the WR
37
Q

re: allotment of shares

When does the power to disapply pre-emption rights cease?

A

The power to disapply the pre-emption rights ceases when the authorisation is revoked or expires (unless renewed). Its renewal term cannot be longer than the term the authorisation is renewed for.

37
Q

What does MA21 stipulate?

A

all shares in the company must be fully paid

38
Q

What is the position in relation to payment of shares?

A

all shares in the company must be fully paid (MA21). This would need to be misapplied if the company wants to issue partly paid shares.

39
Q

When will a shareholder that has only partly paid for their shares need to pay?

A

The SH will need to pay when contractually obliged to or when the company is wound up

40
Q

If a share is issued at a premium, how is this recorded in the company accounts?

A

the sum over its nominal value would be recorded in a separate share premium account on the company’s balance sheet

i.e. a share has a nominal value of £1, it is issued at a premium of £1.75. The excess consideration of 75p is recorded separately but still treated as share capital.

41
Q

If a share is issued at a premium, how is the premium treated?

A

The premium will be treated as share capital and must be maintained

42
Q

What do allotment and issue mean?

A

The terms ‘allotment’ and ‘issue’ are often used interchangeably but mean different things
o Allotment = when the SH acquires the right to be included on the register of members (i.e. the shares have been transferred and paid)
o Issue = the shares are issued when the SH is entered on the register of members

43
Q

What are the administrative requirements when allotment of shares take place? What are the timescales?

A
  1. The following documents must be sent to CH:
    o Any new articles of association
    o All SRs wishing 15 days
    o ORs to either remove an ASC or grant directors authority to allot
    o Form SH01 within 1 months of allotment
    o Paperwork to amend the register of members and PSC (if necessary)
  2. Update internal registers i.e. register of members and PSC
  3. Issue share certificates within 2 months
44
Q

What is share transfer?

A

A SH sells or gives their shares to an existing SH or new person

44
Q

What are the advantages of equity finance?

A
  • SH capital does not have to be repaid (unless the company is wound up and there are remaining funds after creditors have been paid), where as a loan would
  • Value of shares can increase (but they can also decrease)
44
Q

What are the disadvantages of equity finance?

A
  • Generally more risky than debt finance
  • SHs shares will become worthless if the company becomes insolvent
  • SHs will have more rights in comparison to debt finance
  • There are rules around allotment of shares (tightly controlled by CA 2006)
  • It is Ds who decide whether a dividend can be paid, not the SHs
  • The payment of a dividend is not a deductible expense, it is a distribution of profit after it has paid corporation tax
  • New SHs decrease returns existing SHs will get
  • Articles may restrict equity finance
  • More SHs increases the risk of company politics
45
Q

How is share transfer different to allotment of shares?

A

New shares are not created, existing shares are transferred. Therefore, share transfer does not alter the balance sheet but allotment of shares will.

46
Q

What are the pre-emption obligations in relation to share transfer?

A

There are none.

47
Q

If a company wants to frustrate a share transfer, what can the company do? What is the effect of this?

A

The company’s articles cannot be amended to prohibit share transfers, however MA26 gives the BOD discretion to refuse to register the transfer. A transferee does not become a shareholder under the transfer is registered.

The transferor is the legal owner and the transferee is the beneficial owner until the shares have been registered

47
Q

How might a company amend their articles in relation to share transfer?

A

The company can amend their articles to include share transfer restriction provisions i.e. share transfers to family members permitted, other transfers to be approved by the BOD

However, the company’s articles cannot be amended to prohibit share transfers (generally or specific allotments)

48
Q

re: share transfer

where the transferee if the beneficial owner only (i.e. because registration has not yet taken place), what are the obligations on the transferor?

A

the transferor is permitted to attend the GM and receive any dividends but they must vote in accordance with the transferee and pay them the dividends

49
Q

When must the transferee pay stamp duty on shares?

A

If the sale price is over £1,000, unless it was a gift.

49
Q

What is the procedure for shares to be transferred?

A
  1. Transferor must complete and sign stock transfer form and give it to the transferee with the share certificate
  2. The transferee must send the share certificate and stock form to the company
  3. The company must then:
    o Send the SH a new share certificate in their name within 2 months
    o Enter their name on the register of members within two months
    o Inform CH of the change in ownership when the company files its annual confirmation statements (Form CS01)
50
Q

What is the stamp duty currently payable on shares?

A

Stamp duty is currently 0.5% rounded up to the nearest £5

51
Q

When does transmission of shares take place?

A

Transmission of shares takes place automatically by operation of law when either a SH dies or is made bankrupt. The shares pass to the personal representative or trustee in bankruptcy.

52
Q

What is meant by share buyback?

A

This is when the company buys back some of its shares from an SH. The shares are then reabsorbed into the company and cancelled.

52
Q

When transmission of shares takes place, what happens in relation to the shareholder title?

A

Under MA27, the transmittee does not become a SH (i.e. they cannot vote at GMs or on WRs), but they can receive dividends.

They can become registered as a SH or sell the shares in their capacity as representative.

53
Q

What authority is needed for share buyback?

A

The SHs will need to pass an OR

54
Q

What is the effect of share buyback?

A

o Less distributable profits
o The number of shares in the company are reduced
o The % shareholding of each of the remaining SHs increases
o On winding up, there will be less capital available for creditors and SHs (once creditors have been paid)

55
Q

When can share buy back take place?

A

There does not necessarily need to be a commercial reason to buyback shares, however Ds must ensure they comply with their duties (i.e. s172 & 174)

Examples:
o A common justification for buyback is that it is better for the company to buyout a disgruntled SH than work with them in an unproductive way
o A SH wants to cut ties with the company
o An SH wants to retire and can’t find anyone to buy their shares
o The articles contain restrictions on share transfer and there is not enough support for an SR to change the articles

56
Q

What conditions must be satisfied for a share buyback can take place?

A

o The company’s articles must not forbid buyback from capital
o The shares must be fully paid
o The company must pay for the shares at the time of the buyback purchase

57
Q

What are the administrative requirements for a share buyback?

A

Within 28 days of completion, the company must file with CH:
 Return of own shares (SH03); and
 Notice of cancellation of shares

The company must also:
 Keep a copy of the contract at the RO for 10 years
 Cancel the shares
 Update the register of members (and PSC register, if necessary)

58
Q

How can a share buy back be funded?

A

either from distributable funds/new shares or from capital

59
Q

What is the position in relation to the shareholder voting on the share buyback?

A

WR - the SH is not an eligible member and cannot vote

GM - the SH can vote, however if their vote is the reason that the resolution passes, the resolution is ineffective. Therefore, it makes sense for the SH to not vote.

59
Q

What at the procedure for a company to buyback shares using distributable funds/new shares (s609 buyback)?

A
  1. Check the company is not prohibited from s690 buyback
  2. Prepare the accounts to ascertain profits & check shares are fully paid
  3. Directors hold a board meeting to determine:
    o The method of finance (i.e. distributable funds or issue new shares)
    o Approve the terms of the purchase
    o Resolve to call a GM/circulate a WR (the contract memorandum must be circulated with the WR or at the RO for 15 days before the GM)
  4. SHs will need to pass an OR approving the buyback contract.
  5. Directors resolve to enter into the contract and authorise one or two director(s) to execute the buyback contract
59
Q

What is the position in relation to short notice general meetings regarding share buybacks?

A

The contract/memorandum must be at the RO for 15 days before the GM for inspection, so a short notice GM must be at least 15 days

60
Q

What at the procedure for a company to buyback shares using capital (s709 buyback)?

A
  1. Check the company is not prohibited from s690 buyback and S709 buyback using capital
  2. No earlier than 3 months before the GM/WR, the directors must:
    o Prepare the accounts to ascertain profits
    o Check shares are fully paid
    o Prepare statement of solvency (inc. annexed auditors report)
  3. Directors hold a board meeting to determine:
    o The method of finance (i.e. distributable funds or issue new shares)
    o Approve the terms of the purchase, statement of solvency and auditors report
    o Resolve to call a GM/circulate a WR (the contract memorandum must be circulated with the WR or at the RO for 15 days before the GM)
  4. The statement of silence and auditors report are to be signed off no earlier than 1 week before the GM/WR. This must be available to SHs with the WR or at the GMc
  5. SHs need to pass:
    o OR - approving buyback contract
    o SR - approving payment from capital
  6. Complete administrative requirements
  7. Creditors and dissenting members have 5 weeks from the date of the SR to object. The statement of solvency and auditors report must be available at the RO for inspection in the time. If after 5 weeks, there has been no objections from creditors and dissenting members, the board can resolve the enter into the contact and authorise 1 or 2 directors to sign the contract
  8. Capital must be paid within 5 - 7 weeks of the date of the SR
61
Q

Why is it important the s709 requirements are complied with?

A

because if not, the SR will be ineffective

62
Q

re share buyback (capital)

What is a statement of solvency?

A

This is a statement which declares that the company is solvent and will remain solvent for one year after the buyback

An auditors report confirming that they are not aware of anything to indicate that the BOD’s opinion is unreasonable must be annexed to the statement of solvency

63
Q

re share buyback (capital)

if a statement of solvency is made, what is the effect if the company becomes insolvent?

A

If the company becomes insolvent within 1 year, the seller of the shares may be required to contribute to the losses of the company and may face criminal sanction

64
Q

re: share buyback (capital)

what must the company do within 7 days of passing the SR?

A

Publish a Gazette Notice which sets out:
 That SHs have approved payment from capital to buyback its own shares
 The amount of capital
 The date of the SR
 Where the statement and report are available for inspection
 That any creditors can within 5 weeks of the SR apply for a s721 order preventing buyback from capital

Publish an equivalent notice in a national newspaper or give notice in writing to all of its creditors

File the directors’ statement and auditors report at CH (this can be done when the notices are issued or before)

65
Q

re: share buyback (capital)

what must the gazette notice set out?

A

 That SHs have approved payment from capital to buyback its own shares
 The amount of capital
 The date of the SR
 Where the statement and report are available for inspection
 That any creditors can within 5 weeks of the SR apply for a s721 order preventing buyback from capital

66
Q

re: share buyback (capital)

what must the company do within 15 days of passing the SR?

A

file the SR at companies house

67
Q

What is the position in relation to tax when there has been a share buyback?

A

Shareholder usually pay income tax but it will attract CGT instead if:

o The buyer is an unlisted traded company
o The purpose of the buyback is to raise money to pay inheritance tax or the benefit the company’s trade (i.e. there is a rift between SH and company and the buyback will allow the company to function smoothly)
o The seller has owned the shares for at least 5 years
o The seller is selling all of their shares or substantially reducing their percentage shareholding (by at least 25%) to a maximum of 30% of the issued share capital of the company

The seller can contact HMRC if they are unclear

68
Q

How do groups of companies seek to protect themselves from insolvency in relation to shares?

A

Companies might link together to form a group of companies by buying shares in one another

The benefit of this is that if one goes insolvent, liability will be divided up between the companies so that the others can still operate

69
Q

When will a company be a parent/holding company of another?

A

A company will be the parent/holding company (A) of another company (B) if:
o It holds more than 50% of the voting rights in B; or
o It is a SH with the right to remove/appoint the majority of the BOD of B; or
o It is a SH and controls alone (by agreement with the other SHs), the majority of the voting rights of B; or
o If B is already a subsidiary of another company

70
Q

How many holding companies can be in a group structure?

A

There can be more than one holding company within a group structure if a company further down the chain meets the above requirements (if this doesn’t make sense re-visit notes and see example). This means company B would be a subsidiary company.

71
Q

When will a company be a wholly owned subsidiary? What does this mean?

A

A company will be a wholly-owned subsidiary if the parent company owns 100% of the voting rights

In other words, there are no other SHs in the company

Business Law & Practice (17 decks)

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